Skanda, Inc. sells clothing, shoes, and accessories at a suburban location in Boston. Here is information for the year ended June 30, 2009:
Clothing Shoes Accessories
Departmental Sales $850,000 $320,000 $230,000
Subtract: Departmental Costs
Variable Costs $510,000 $256,000 $ 126,500
Fixed Costs 290,000 70,000 42,000
Total Costs $800,000 $326,000 $168,500
Departmental Operating Income (Loss) $ 50,000 $ (6,000) $ 61,500
Management is considering closing the shoe operation because of its operating loss
Assume that the Fixed Costs listed under Departmental Costs include $105,000 of company-wide fixed costs that are not traceable to any of the individual departments. These common fixed costs have been allocated to the departments as follows: $63,750 was allocated to the Clothing department, $24,000 to the Shoes department, and $17,250 to the Accessories department. Based on these new assumptions:
a. Prepare a segmented income statement for Skanda, Inc.
b. Would closing the Shoes Department improve the company's net income? Explain.
Skanda operates a manufacturing process that generates two joint products, ThingOne and ThingTwo. The budget forecast for the upcoming period is as follows:
Product Quantity Produced Allocated Joint Cost Allocated Joint Cost
ThingOne 5,000 gallons $100,000 $20
ThingTwo 1,000 gallons 20,000 20
The selling price for ThingTwo was $30 per gallon last period, but due to recent changes in the market, Waco forecasts that the selling price will be only $7.50 per gallon next period. Waco's managers have determined that Waco has the following three choices:
- Sell ThingTwo for $7.50 per gallon.
- Process ThingTwo into a different product, ThingThree. It costs an additional $2.00 per gallon to process ThingTwo into ThingThree, but ThingThree sells for $9.00 per gallon.
- Discard ThingTwo instead of selling it or processing it. There is no disposal cost.
What should Waco's management do? Explain your reasoning.
Skanda is planning to buy injection molding machinery costing $160,000. The machinery has an expected useful life of 5 years, and it will be depreciated using the straight-line method, assuming a $20,000 expected salvage value. Skanda requires a minimum rate of return of 8%, and they have made the following forecasts pertaining to the operation of this machinery:
Year Estimated Annual Operating Cash Inflows Estimated Annual Operating Cash Outflows Annual Depreciation
1 $ 40,000 $8,000 $28,000
2 $50,000 $18,000 $28,000
3 $75,000 $22,000 $28,000
4 $105,000 $35,000 $28,000
5 $110,000 $50,000 $28,000
Assume a tax rate of 34% on all taxable income.
1. Determine the Payback Period for this proposal.
2. Determine the NPV for this proposal, assuming an 8% required rate of return.
3. Determine the IRR for this proposal.
4. Do you recommend that Skanda proceed with this proposal? Why or why not?
This solution provides a detailed a computation of the given accounting problem.